What to Know About a Consultant Confidentiality Agreement
A consultant confidentiality agreement, also called a non-disclosure agreement, is a contract between a business and a consultant to keep confidential information and trade secrets safe. A consultant is considered "engaged" once they start to work with your staff or with other third parties for your business. By signing a consultant confidentiality agreement, a consultant legally agrees to treat your sensitive information as confidential material and will not share, copy or utilize it for his or her own benefit . Confidential information involves any information which could give your competitors a competitive edge or benefit from utilizing it only. Sometimes, but not always, confidential information includes proprietary information, product demos, service packages, research, client lists or special business processes. Under the consultant confidentiality agreement, your organization typically lays out all the actions a consultant must take to keep sensitive information secure. Lastly, the consultant confidentiality agreement is typically used when a consultant does not have access to a company’s internal computer system.
Common Clauses of a Confidentiality Agreement
A confidentiality agreement should clearly set out what information is confidential. This usually includes trade secrets and other information that may harm the company if disclosed. It is important for a company to be clear with consultants on what information is considered confidential so the consultants understand their obligations.
In addition, a consultant confidentiality agreement should clearly set out how long the consultant will have to keep any confidential information secret. Obviously, the company does not want the people it has agreements with to disclose information at any time in the future, but a non-disclosure obligation effective for a long period of time is meaningless if the consultant only had such information for a short period of time. The non-disclosure obligation must be proportionate to the amount of time the company needs to maintain the confidentiality of the information.
The scope of the confidential information is important as well. When dealing with consultants, it is possible that the consultant may provide the information to people that report to her or him. A confidentiality agreement is likely going to need to include the people to which the consultant is permitted to provide confidential information, and may prohibit the consultant from seeking to obtain employment from any of the people to which she is allowed to provide confidential information.
Confidentiality Agreements: When Do You Need One and Why?
A consultant confidentiality agreement is absolutely essential when the consulting project will afford the consultant access to confidential company information. One such situation is when the consultant will be involved in the development of a product or service which will become the basis of a business plan. Assuming the need for, and the desirability of, keeping that information confidential, even after the developing of the business plan, an NDA/Confidentiality Agreement with the consultant is called for.
This also is the case when consultants are involved in the analysis of proprietary technical or scientific research. Many companies have experienced experts in their field who often are employed in the analysis and report on the viability of projects based on a company’s proprietary technical and scientific research.
Yet another situation that arises is when a company has a joint venture, strategic alliance, acquisition, merger or some type of marketing, distribution or sales agreement with one or more other parties. Often there is at least some proprietary technical or scientific information shared with consultants.
In each of these circumstances, though perhaps not in every circumstance, a strong case can be made for the protection of the company’s proprietary information as something that justifies the use of confidentiality agreements.
How to Write a Powerful Confidentiality Agreement
Confidential information is generally protected from having to be disclosed in a legal proceeding until such time as it ceases to be confidential (i.e., become public or otherwise lawfully obtained from another source). However, companies generally want something more. They want their prospective consultants to sign a written confidentiality agreement. This type of agreement provides a written record that there was an obligation not to disclose and that there actually was a disclosure of information. Confidentiality agreements also can be drafted to provide the company with the right to obtain return of confidential information and/or the right to inspect what was done with it.
The process of having consultants sign confidentiality agreements starts out the same as non-competition clause—the earlier the better. If a consultant is already working on a project when the confidentiality agreement is presented, the consultant’s ability to refuse to sign avoids having been locked into a contract that would interfere with the work. Each agreement would need to be carefully drafted so that whatever mutual obligations exist on both sides are broken down and precise examples are included of the types of things that will be treated as confidential information. Categories of items could include:
• customer lists;
• pricing;
• product information;
• third party materials; and
• internal policies and procedures.
However, even though the agreement is recommended, the company representative should not then go explain the project that is going to be done under a non-existent confidentiality agreement. The company representative should go through the same type of care and control process as for a non-compete or non-solicit. But once the consultant has been open about his or her desire for confidentiality, then the company should insist that the consultant sign a confidentiality agreement. Once signed, there should be an education process so that he or she knows exactly what will be treated as confidential information and that it will be understood that there should be no use of confidential information other than in connection with their engagement with the company.
Legal Consequences of Breaking Confidentiality
Consequences of Breaching Consultant Confidentiality
If a consultant breaches an agreement of confidentiality, several possible consequences may arise. Primarily, that disclosure may lead to a loss of client data or sensitive business information for the company. If a consultant has signed a non-disclosure agreement (NDA), then it is evident that the client perceives some kind of risk from the consultant gaining access to confidential material. But assuming that the breach is substantial enough to threaten the life of the business, there are serious legal ramifications that can occur. A consultant who violates a nondisclosure agreement can be sued for damages. An agreement should clearly define what kinds of information are considered confidential, to protect the interests of the business engaged with the consultant. The public policy of most states is to broadly enforce contract provisions. Unless there is a very good reason, if there is an NDA signed by both the business and the consultant, the courts will generally uphold its enforceability. For example, in the New Jersey case, Hartz v. Data General Corp., the Appellate Division enforced the provisions of a non-competition and non-disclosure clause that restricted an employee from accepting employment with a competitor for one year after moving on from their previous employer. The Appellate Division explained that the restriction was reasonable because it only applied to those clients with whom the employee dealt while working for the employer . The Appellate Division noted that the most important factor in determining the reasonableness of that restriction was "the need to protect the employer’s legitimate business interest." A non-competition agreement that is rationally designed to protect the employer’s secret methods of doing business and its confidential customer list, however, does not necessarily demonstrate that the restriction is more extensive than necessary in regard to time, purpose, or geographic location, provided the period of restraint is two years or 24 months." In New Jersey, as is customary to common law, an employer must satisfy three elements to establish a claim for misappropriation of trade secrets. Namely, it must show that: "(1) the information at issue is a trade secret; (2) the defendant acquired that trade secret through some type of improper means; and (3) the defendant used the trade secret without consent in his business." It is not uncommon, post-termination of an employee or consultant, for that employee or consultant to solicit clients to join him/her in the new endeavor. Common appropriate actions that courts have upheld against a consultant or any party who violates an NDA are: financial damages to the business; injunction against the consultant from working with competitors for a certain period of time; and/or requiring the consultant to relinquish any profits they may have derived from their actions. Sometimes, courts will also require that the consultant pay the other party’s attorney’s fees if the NDA they signed contained a provision stating that attorney’s fees could be awarded to the party who prevails in the litigation.
Standard Confidentiality Agreement Alternatives
Some feel that traditional Consultant Confidentiality Agreements do not afford enough protection to the company so that they utilize an alternative – a non-disclosure agreement ("NDA"). There are circumstances where an NDA may work better. For example, if a consulting gig covers a very narrow topic such that the information is highly sensitive, proprietary to the party disclosing the information, and the likelihood of a confidentiality breach is high, an NDA may be appropriate. The NDA gives the disclosing party broader and more complete protections because the scope of the NDA may go beyond the scope of the particular consulting engagement. With an NDA, if a party that is privy to confidential information divulges that confidential information to others with whom it has no connection with the NDA (e.g. its own affiliates), that party would be liable to the party disclosing the confidential information under the NDA. It is a bit more difficult to attach liability to a breach under a Consultant Confidentiality Agreement because, in most cases, the only liability for a breach by a consultant flows to the consultant and not anyone else who divulged the confidential information. Because an NDA may give broader protections, a party or parties may be involved with multiple NDAs at any given time. Hence, an NDA may be appropriate if you want protection beyond the consultant who is providing the consulting services. For example, if you are a financial institution and you seek advice from several "consultants" throughout the year on various and possibly unrelated investment opportunities, you may wish to consider subscribing to an NDA, because the financial institution itself may lack control over the consultants and their potential disclosures of confidential information they obtain from the financial institution.
Confidentiality Agreement Trends and Modifications
With the advent of new technology and increased reliance on digital communication has also come new trends and changes in confidentiality agreement language. The rise of remote consulting, the gig economy, and the increase in contractual work of all kinds has seen many contract consultants who operate virtually from their homes. For these types of contractors, a confidentiality agreement is even more essential as the risk of electronic leaks that must be guarded against is heightened. Depending on the type of data or information that a consultant is privy to, a company may want to expand the definition of confidential information to include digital data such as metadata files, raw data, encrypted data, and consensually acquired data. In such a case, a company must strongly consider ensuring that their confidentiality agreement includes a clear definition of data and metadata and digital data and encrypted data, if that is a concern. Issues of ownership over data files and metadata must also be clearly addressed in the confidentiality agreement.
Another trend that has emerged from the recent reliance on digital mediums and working arrangements is the rise of the "poaching" clause in confidentiality agreements . These types of clauses expressly set out that the consultant will not solicit an employer’s customers after the end of a contract and often attempt to limit the poaching of an employer’s employees, vendors, and other outside contractual relationships as well. Poaching restrictions have increasingly become more nuanced due to several reasons, including the ant-competitive implications and the risk of being seen as being broader and more restrictive than necessary. Moving forward, companies will have to carefully review the potential risks and implications of ‘poaching’ clauses in order to determine their enforceability and degree of validity in different contexts.
The increase of consultants and gig workers has brought new challenges for companies and contractors alike as the nature of contract work becomes more blurred and multifaceted. As some experts have put it, the continuing evolution of what independent contracting means will shape the landscape of contract work for years to come. With these changes, it is essential that companies and consultants stay abreast of the evolving landscape and seek out the most current legal advice when reviewing and drafting confidentiality agreements in response to maintaining confidentiality and costs from unexpected contract disputes.